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Financial overhaul? Few circumstances you must consider

By Priya Nair
December 14, 2015 13:15 IST
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Every financial plan needs to be tweaked periodically.

It could be on account of an increase in income due to a salary increment or bonus.

Or if expenses rise due to a planned or unplanned purchase.

Sometimes, however, a plan could need a complete overhaul and the family have to take drastic steps to bring it back on track.

Wrong instrument Sometimes, an overhaul might be needed if the investment was in the wrong financial instrument or due to over-dependence on one asset.

Mumbai-based certified financial planner Deepali Sen cites the case of a client whose costly real estate purchase has required some drastic steps to correct their financial situation.

The family has two sons, aged 10 and eight years. They invested in a house worth Rs 4 crore, after taking a loan of Rs 2.75 crore.

The remaining Rs 1.25 crore was raised by selling an earlier property.

"The plan was to sell the property after a few years, for about Rs 8 crore and use the money for their sons' higher education and other goals like retirement.

But, the EMI (equated monthly instalment) of Rs 2.75 lakh a month will put a strain on their finances," says Sen.

Since the property is under construction, the current EMI is Rs 1 lakh, which is only the interest portion.

Sen has advised the family to invest the remaining Rs 1.75 lakh every month, so that they can build a corpus of Rs 40 lakh.

This can be used to repay a portion of the loan by the time they get possession of the house in January 2017.

This will bring down the EMI to about Rs 2.3 lakh.

Other more drastic steps include shifting from the current rented three-bedroom-hall-kitchen (BHK) house to a two-BHK one, saving about Rs 20,000 a month.

And, for the wife to start working, which should bring in another Rs 60,000 a month.

"I had broached the idea of selling the flat back to the builder but the family was not ready for it," says Sen.

Hence, the advice of moving to a smaller flat and for the wife to start working again.

Otherwise, they will not be able to meet their goals of retirement and saving for their children's education, due to the over- dependence on real estate.

The unexpected Many a time, the death of a family member can put a lot of strain on a family's resources.

Anil Rego, founder of Right Horizons, cites the case of a client who passed away suddenly due to a heart attack, leaving a wife and two children.

The customer had employee stock options and joint bank fixed deposits (FDs) with his wife. Luckily, there were no liabilities.

"The wife's predominant requirement was to get regular monthly payments for her and the children,'' says Rego.

To ensure a regular income, some equity investments were first moved to debt ones, with payout options.

This ensured the tax liability was optimised. The equity component was monitored and switched to debt plans, to fund the children's education on the required timelines.

The money from insurance and final settlement from the employer was re-invested, in line with the family's needs. There are also cases where death of a family member can push back your goals by a few years, if there is no proper planning.

Another of Sen's clients lost his father to cancer. He had to take a personal loan of Rs 5 lakh, since his father was retired and had no health insurance.

"He (the son) had just started working and his salary was not very high.

The personal loan has pushed his goal of marriage back by three to four years. He can start saving for his marriage only after the loan is paid off,'' she says.

Suddenly aggressive One can also salvage a costly purchase with proper planning, using aggressive measures like liquidating a significant part of the savings.

When Ravi Kumar Iyer, another of Sen's clients moved from Torangallu, near Bellary in Karnataka, to Mumbai two years earlier, he knew that monthly expenses would increase due to the higher cost of living.

However, instead of increasing his monthly savings, he invested in a property for which he took a loan of Rs 50 lakh.

The monthly EMI was Rs 1.3 lakh. As he had only a little more than five years to retire, this was not wise. Iyer was advised to pay off the home loan, which he did by liquidating 60 per cent of his savings. These were largely in bank FDs and a mix of equity and debt mutual funds. "It made sense because I now have no loan.

The property price has seen appreciation. And, instead of paying EMI, now I am saving the same amount in balanced funds, which will give me higher returns,'' says the senior official with a private steel company. The mistake Iyer made was paying high interest on a loan when it was not adding any value, says Sen. Now that he is debt-free, he can use the same amount to save for his retirement.

This will ensure he is able to maintain the same lifestyle even after retiring. Sabbaticals, children While buying a house is expensive, it need not be a strain on your finances if planned in advance.

Mumbai-based Ambuj Johri, who works in the oil industry, took three years to save for the down payment on a house. He earmarked a portion of the Rs 2 lakh a month he was saving towards this.

By investing in short-term debt funds, Johri was able to build a corpus of Rs 30 lakh. Now, the Rs 50,000 EMI is affordable for the family.

"Before purchasing the house I was investing in a mix of equity and debt. Now, my savings are mostly in equities because other goals are more long term, such as retirement and saving for my brother's wedding," says Johri.

Having a child or pursuing higher studies can also put a strain on one's finances.

Hence, families must always make adequate planning before the actual incident, says Balakrishnan Venkataramani, founder of Vensiva Financial Solutions, who advised Johri on his financial planning.

"Many people might take a sabbatical after working for three to four years to pursue higher studies.

Or a couple might decide that one spouse will stay at home after they have a child. In such cases, it is advisable to manage on the lower income for at least two years before the incident and increase one's savings.

This will also help build a buffer, which can take care of six to 12 months of fixed expenses like EMI, etc," says Venkataramani.

While adjusting with a single income, families should increase the monthly Systematic Investment Plan (SIP) amount, cut expenses such as eating out, foreign holidays, splurging on gadgets, etc.

For those going to study further, Venkataramani advises keeping enough funds to repay the EMI on the education for one year, in case there is a delay in getting a job.

It is advisable to choose safer instruments like liquid funds or bank FDs while saving for the goal if it is a few years away.

This will ensure returns within the time frame. Once the goal is achieved, you can allocate a larger portion to equity funds, which will ensure higher returns over the longer term.

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Priya Nair
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